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Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive and powered by Canada Life. For today’s Soundbites, we’re talking about real-asset allocation with Vince Childers, senior vice-president and head of real asset multi-strategy with Cohen & Steers. We talked about current market conditions, interest-rate implications, and we started by asking him to summarize his case for real assets.

Vince Childers (VC): Since the summer, we’ve gone out trying to make a few points about the macro backdrop as we see it, and how we think that supports the case for getting involved in real assets, let’s say, sooner rather than later. The key to the thesis, really for us, is that we think we’re going to face a pretty resilient economic growth environment over, say, the next six to 12 months. A big part of that, we think, is going to be underpinned by a balanced labour market. A second point is we’re probably stuck with persistent inflation above the Fed’s target in the case of the U.S., but really we see this in developed markets more broadly. We are entering an environment of rate cuts. And we think this kind of pulls together a backdrop where we expect to see real interest rates or real yields declining. When we put all those pieces, that type of backdrop is typically what’s been very good for real assets, broadly.

Labour market implications

VC: We have seen the pace of non-farm payrolls actually cut quite a bit, particularly after recent revisions. I think that’s where most of the bear case is developed, the labour demand side. We think, though, that you have to look at the other side of this — effectively the supply side. We’d say, look, labour supply is also contracting. In the U.S. market, for example, immigration and immigration policy is obviously having a large effect on labour supply in the market. But more broadly, is just the situation of demographics, where we have aging demographics, we have folks leaving the labour force. And really, when we put those two things in balance, what do we see? A still-low unemployment rate. And if you want to think about it more precisely, think about something like job vacancies to unemployment, that VU ratio. It’s right around one, where it has been, which, to us, signals a pretty balanced labour market. So that kind of stability, we think, is what can support consumer spending and support wage growth, and in turn, sustain some of the inflationary pressures that tend to benefit real assets. We just think that you need to put together the demand side with the supply side in labour to make sense of what’s going on. And when you do that, we think you see just a much more balanced picture.

How inflation comes into play.

VC: Stickiness in inflation, I think, whether it’s our forecasts, what you see in surveys in the markets, or honestly, what you see with even the Fed’s own forecast, right? The sort of dot plot. There’s no indication, really, across any of these metrics that inflation is expected to revert back to its 2% target rate anytime soon. I think, from our perspective some of the core measures and super core measures have kind of hooked up a little bit even. If the inflation rate picks up even a little bit, it’s typically that sort of inflection in the rate on the upside that gives a kick to real assets. And so that’s something we’re kind of focused on as maybe an additional catalyst, is do we see even more upside risk from here than what people are expecting? This environment of declining real yields at the same time inflation expectations start to rise, that has been a sort of relative sweet spot for real-asset performance.

What he likes right now

VC: There are really what we refer to as the core four real asset categories that really build or underpin the asset class. For us, that’s global real estate exposure — so REITs, owners, operators, developers of commercial real estate, public markets where you find them. So REITs, one. Commodity futures exposure, two. Three, natural resource equities, so your energy companies, agribusiness and so forth. And then listed infrastructure companies — everything from utilities to towers to various types of transports. Midstream energy finds a set way in there, etc. But those core four? Virtually every diversified real-asset portfolio we put together is going to be focused around those assets. The way we’re tilting right now favours resource equities, which looks still sort of statistically cheap, but have an improving growth profile, had this positive inflation sensitivity, if we’re right on that part of the macro picture. We also like infrastructure. We like the growth profile. And there’s a whole lot of things to like about where valuations stand in infrastructure right now. So those are kind of two biggest overweights in the portfolio. And I’d say infrastructure gives us also a little bit of a defensive quality within the real assets.

And finally, what’s the bottom line for potential real asset investors?

VC: We’re always going to argue for this asset class as a strategic holding. We think real assets deserve a permanent place in the broader strategic asset allocation, even if that’s a kind of utility player to sit alongside your kind of core stock and bond exposures. I don’t think any of that has gone away, right? We’re always making that kind of long-term argument. I think what’s interesting from a bottom-line perspective, though, is that where we stand right now, diversification is particularly valuable given the lack of diversification that most investors are holding on the risk side of the ledger, in particular. And so we do see an environment of secularly declining real yields and inflation expectations rising in tow. That could be a nice kicker for, let’s say, people getting involved in doing now what we think they should always be doing for their long-term portfolio health.

Well, those are today’s Soundbites, brought to you by Investment Executive and powered by Canada Life. Our thanks again to Vince Childers of Cohen & Steers. Visit us at investmentexecutive.com where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.

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